Good Evening: Stocks were poised to correct their recent gains today, but a late rally extended the winning streak for both the Dow and NASDAQ to seven straight. The earnings news was deemed positive by market participants, though the bottom line “beats” came even as top line revenue estimates fell short. Cost cutting can always flatter the profit figures in the short run, but mass layoffs, deferred capital expenditures, and jiggered tax rates are not what creates either prosperity or long term wealth. Perhaps business executives are taking these actions in the hope the Fed’s aggressive monetary policies can restart the economy, save their careers, and prevent their stock options from expiring worthless, but Mr. Bernanke himself is fighting for his job these days.
With no economic releases on tap today, our index futures markets relied upon earnings releases to guide trading prior to the open in New York. Caterpillar, Texas Instruments, DuPont, UnitedHealth, and Freeport-McMoran all reported positive surprises to one degree or another, though most required financial gymnastics to achieve these “beats”. For all but FCX, revenues came in on the light side. Such a divergence between revenue and profits will be hard to sustain, but who knows? IBM has been managing to pull off this same trick for years, and investors have rarely put the stock in the penalty box for it.
CIT has certainly been penalized of late, though, and today brought word the company’s privately funded recap is in doubt (see below). Reported as a virtual certainty only yesterday, the deal looked less than done today. Fresh concerns about CIT helped cause the stock market to retrace its opening gains of 0.5% or so. CAT helped the Dow remain aloft, but the rest of the tape fell in for a bit of profit taking. Most of the major averages were down some 1% at mid day when stocks began to recover. Acting as if few investors wanted to be short ahead of Apple’s earnings release this evening, the whole tape healed by the time the closing bell rang.
The Dow’s 0.75% gain led the way, while the Dow Transports lagged with a loss of equal measure. Treasurys were on the strong side, with yields falling between 6 and 12 bps. The yield on the benchmark 10 year note is now once again below 3.5%. The dollar was on the lethargic side, with smallish early losses giving way to smallish gains later in the day. Commodities followed stocks to the downside early on, but, unlike equities, they never really recovered. Pulled down by losses in the grain complex, the CRB index gave back 0.5% on Tuesday.
The 2010 campaign season kicked off today, and I’m not referring to the folks in Congress who constantly seem to be running for office. No, the race for high office I refer to is the one for the Chairmanship of the Federal Reserve System. Ben Bernanke may occupy the corner office in the Eccles building right now, but others covet his job. Perhaps sensing the brewing competition, Chairman Bernanke fired off a pre-emptive salvo in the press prior to his semi-annual testimony on monetary policy before Congress today (see below). He wanted to reassure long bond investors that, cross his heart, the Fed would tighten policy at the “appropriate time”. Not content that politicians can read, the Chairman then trudged to the Hill and took to the microphone. He tried to strike a balance between caution (downside risks remain) and optimism (tentative signs of recovery). He even tried to claim his share of credit for the receding financial crisis.
“Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system,” he said. “Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve.” (source: Bernanke testimony before Congress)
Unmentioned, of course, was the Fed’s role (mostly under Greenspan) in fostering the credit bubble that later froze the credit markets, but Mr. Bernanke was not shy in saying the Fed’s monetary blowtorches were responsible for the thaw now under way. For this professorial man to strut, even a little, in front of elected officials and the media must mean he feels his job is on the line. As a Bush appointee, Bernanke knows he represents anything but the type of change promised by the Obama administration.
Bernanke knows who wants the keys to his office, too. One is Janet Yellen, and another is Larry Summers. I have no great love for Mr. Bernanke, but it’s probably fair to say that his tenure at the Fed has been marked more by trying to clean up messes than it has been marred by creating them. Neither of his main contenders can make such a claim; if anything, they’ve been part of the problem. Summers would be an especially poor choice, since he would be viewed as politicizing the Fed. Knowing that Bernanke would be on the Hill today, for example, Summers took the airwaves in a thinly veiled attempt to stay relevant (see below).
As the junior member of the famous troika on the late ’90’s Time Magazine cover, “The Committee to Save the World”, Summers is the only one of the three not (as yet) to have scorn heaped upon him. Greenspan has been unmasked as a disgrace, and Citigroup shareholders silently curse Rubin for his poor stewardship. I guess Summers wants his friend, President Obama, to give him a shot at redemption after some of his policies as Treasury Secretary under Clinton came a cropper during the credit crackup. Summers would be anything but “change we can believe in”, but his appointment would have some redeeming value. It would allow him to join the other “Committee to Save the World” members in validating the Time Magazine cover jinx. What happened to Greenspan, Rubin, and, to some extent, Summers after that cover came out is a fitting reminder that when someone tells you they want to save the world, just politely turn them down. History is littered with examples of well meaning people who did a lot of damage to the world in the name of saving it.
— Jack McHugh
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